Grandfather’s Utility Threatened by Renewable Islands of Profits

Apr 09, 2014 12:00 am ET

April 9 (Bloomberg) -- Technology is catching up with Thomas Edison’s electricity industry, eating away at the utility business model that hasn’t changed much in a century.

Clean energy installation will almost triple to 290 gigawatts in 2030, driven by a plunge in the cost of wind and solar power, Bloomberg New Energy Finance forecast at its conference, which finshes in New York today.

Electricity from wind and solar is now competitive on price against coal and natural gas in places such as Chile and Texas. That’s forcing utilities to rethink how they obtain power as the number of places multiplies where renewables holds their own against fossil fuels.

“It’s not going to be your grandfather’s energy industry,” Nancy Pfund, a managing partner at the San Francisco-based venture capital company DBL Investors LLC, said at the conference. “We’re going to see a parallel evolution in energy like we’ve seen in computing, phones and radio. There really hasn’t been an innovation cycle in energy in 100 years.”

Wind power in some parts of Texas, without subsidies, is now about 3.7 cents a kilowatt-hour. That’s about as cheap as anything from fossil fuels, said Michael Liebreich, chairman of New Energy Finance’s advisory board.

A 70-megawatt solar farm under construction in Chile is expected to sell power on the spot market, competing head-to- head with electricity from other sources.

These examples aren’t typical. West Texas is one of the windiest parts of the U.S., and northern Chile’s Atacama desert is the sunniest place on Earth.

Competitive ‘Islands’

Liebreich described these as “islands of competitiveness” where renewable power can compete without subsidies. “These islands have been growing for decades.”

Exelon Corp. CEO Chris Crane, whose company is the biggest U.S. nuclear power generator, said he expects more renewables and natural gas to enter the energy mix in the next few years, though there’s still a place for its atomic plants. He said government policy is one of the main drivers for change.

The cost of solar panels has declined 62 percent since the start of 2011, and wind turbines have come down 12 percent, according to data compiled by New Energy Finance.

Renewables “are within striking distance of being competitive on their own two feet,” Liebreich said.

Energy companies must plan for a future without subsidies for renewables, said General Electric Co. Chief Executive Officer Jeffrey Immelt.

“My assumption is that there will be a time when it’s not subsidized,” Immelt said at the conference. “The cost of electricity counts. Renewables have to find their way to the grid unsubsidized.”

‘Shut Up’

Immelt said he spends so much time telling coal-heavy power generators they have to change that executives tell him “shut up Jeffrey.” The industry’s business model, with centralized power plants distributing electricity to customers hasn’t changed much since Thomas Edison flipped the switch on the first investor-owned power plant in Manhattan in 1882.

GE, the biggest U.S. supplier of turbines, is working to drive down costs by improving its wind designs, potentially expanding those islands of competitiveness.

Utilities aren’t likely to disappear even though renewable energy is transforming the industry, said Arno Harris, CEO of Recurrent Energy, the U.S. solar unit of the Japanese electronics maker Sharp Corp.

“You can’t just take on the utilities and destroy them,” Harris said in an interview at the conference. “It’s inevitable that solar will become a bigger part of the energy mix and we need the utilities to help manage the grid.”

Still, utilities need to go further in adapting to the new reality, said First Solar Inc. CEO Jim Hughes.

‘A Beginning’

“The technology onslaught is not near an end,” Hughes said on a panel discussion. “It’s at a beginning.” He expects to see new systems developed that will manage solar power as it’s produced and as it travels across the grid. “We don’t think anyone in the business can sit on their hands. Things will continue to progress. Costs will continue to come down.”

Financing is also driving down the cost of renewables, said Jigar Shah, the founder and former CEO of SunEdison LLC. Capital costs are now often less than 6 percent to 7 percent, in step with other industries, as investors become more comfortable with backing renewable energy projects.

“Most people in this room believe that access to the lowest cost of capital is completed,” said Shah, who’s now a consultant. “The question is: can developers develop enough projects to satiate the money? Can this industry really deliver the deals now that the money isn’t an issue? Can you feed the beast? We are long money and short deals.”

--With assistance from Christopher Martin and Ehren Goossens in New York.