Renewables revolution – what should utilities do? Part 2: The choice
Across the globe, renewables are entering into their second phase: no longer driven by subsidies or even climate concerns, they directly compete with existing fossil fuel based power. So far, few utilities have been able to manage even the first phase successfully. And they seem to be struggling to strategize the second. Why is that the case? Should they oppose or embrace renewables? This is Part 2 of a three part series on utilities and renewables, looking at how utilities should respond to this new scenario. To read part one, click here. The third looks at how utilities can successfully re-invent themselves. Click here to read part 3.
- Utilities in many countries are trying to block policies that promote renewable energies, distributed generation and competition
- They should, however, embrace the inevitable and make an opportunity out of a threat
- While this is not a guarantee for their future success, it is probably their best bet
Electricity utilities can still portray themselves as ‘systemically relevant’ and ‘too big to fail’ in the way large banks do. They are tasked with ensuring that electricity is always available and that there are no blackouts by maintaining and expanding the grid and balancing the flow of power in it. It would, however, be unwise for utilities to overplay this position as they may rapidly lose it, if they do not quickly set themselves up for success in the new energy world, where renewables will make up half of the additional power generation capacity to be built globally until 2035 (IEA estimate).
Utilities today see renewables no longer as an insignificant fad. Instead, depending on the level of renewable penetration in a country, they see it as either a nuisance or a threat. And the position is all too often one of opposition. They fight ‘unjust’ subsidies or other privileges for renewables, forgetting that fossil fuels and nuclear power have since long been supported by governments. In fact, the IEA estimates that global fossil fuel subsidies in 2012 amounted to USD 544 bn as compared to USD 100 bn for renewables. They decry the high cost of renewables, forgetting that the pricing of traditional power falsely fails to include very expensive externalities such as effects on local pollution levels, habitats and livelihoods, climate or the cost of securing fuel imports. They warn of the destabilizing effects of infirm power on the grid, while good grids (e.g. in Germany) work well with high penetration levels of renewables and unreliable grids (e.g. in India) are unstable even without renewables and distributed generation might actually help stabilize them.
In Europe, utilities are still opting for investments into coal generation plants, driven by falling coal and carbon prices. While this might give short term respite from commercial bottlenecks, it is a strategically flawed choice. Coal-fired plants are simply too inflexible. This shows the increasing divide between the choices of traditional power generators, whose path-dependency both of past investments and current mindsets ties them to centralized generation and the likely electricity architecture of the future (distributed, smart). In Germany and California/US, rooftop solar is an increasingly attractive option for households based on the costs of solar and grid power alone. In both places, utilities are very uneasy about this development and try to stall it through imposing adverse regulations and requirements. In India, too, in the state of Maharashtra, where power tariffs are highest, the state utility is fighting private generators through various petitions and tariff orders.
There is an alternative choice for utilities: Rather than wasting efforts to stymie renewables, they should actively create the energy future. This would put them in a much better position to voice legitimate concerns. Firstly, utilities need long-term visibility on a national energy strategy. That will allow them to make corresponding investment choices into grids and power generation capacities. Currently, almost no country has a clear, long-term strategy on how to manage the big transition from old to new energy systems. Secondly, they need to know how balancing and spinning reserves will be priced during this transition and who pays for these services (and they should be paid for). Thirdly, they should have more clarity on the pricing of carbon.
At the same time, utilities should seek to play a much stronger role in renewables themselves. There have been some investments into large off-shore wind and solar parks, and of course large utilities develop hydro power plants. However, portfolios are still highly lopsided. Even if they are not used to it, utilities are in a good position to go into distributed, renewable power generation. They have vast experience in managing grids. More importantly still, they often have direct access to the power customers. In the new energy system, this will be the crucial advantage as the consumer will increasingly be able to choose where to get power from.
Refer to part 1 of the blog series here.
Refer to part 3 of the blog series here.
Tobias Engelmeier is the Managing Director at BRIDGE TO INDIA.