Power company revenue is under siege by energy efficiency and small-scale solar power, says a Fitch ratings analyst.

Rooftop solar power and energy-efficiency programs will eat into utility revenue and profit margins and discourage investment in new transmission projects within five years, a Fitch Ratings analyst said.

Utilities in stagnant or low-growth markets in the Midwest and Northeast face the biggest losses as more businesses and homeowners install their own generation systems and upgrade to more efficient appliances, said Glen Grabelsky, Fitch’s managing director of utilities, power & gas. Retirees flocking to southern states may offset some losses for local utilities.

This is serious business for utilities as Bill Howley of The Power Line notes:

Fitch is issuing this report as a warning of downgrades to come if power companies don’t step and squash rooftop solar power soon.

The demand loss for grid electricity will be significant as further remarked by Grabelsky of Fitch Ratings:

Loss of demand from customers that go solar or reduce consumption in other ways will shift more and more grid costs onto customers that do nothing. As there are more and more successful Off Grid Solar Projects, traditional grid companies will have to change with the new developments or be left behind. Power supplied by U.S. utilities declined 3.4 percent last year, largely from energy efficiency and on-site solar generation, which reduces demand for electricity from the grid, Grabelsky said.

Unless utility rate structures change, that will reduce utilities’ abilities to invest in major new projects and upgrade their transmission systems, Grabelsky said.

“It will have a negative impact on their ability to raise capital,” Grabelsky said. “Regulators will ask, ‘Do you really need all that new transmission when there’s no demand growth?’ There’s the potential for stranded assets.”

A recent study by the Edison Electric Institute (EEI), “Disruptive Challenges – Financial Implications and Strategic Responses to a Changing Retail Electric Business”, basically reiterates Grabelsky’s view of the threat to utilities by energy efficiency and distributed energy generation. The report details corporate utilities’ angst regarding their customers’ shift to go solar and reduce demand for grid electricity. Many are switching over to prepaid energy plans for their grid electricity, which is a greener option and more cost-effective to manage. With fewer people deciding to have a look for certain types of grid electricity, they are less likely to be overcharged by their utility company, which is good news for the customer.

How will utilities compensate for the loss of demand? Howley, in his “The Power Line” blog, gives a good response:

This translates into: do away with net metering and charge higher rates to people who install solar panels and invest in efficiency.

John Vincent, a former Montana Public Service Commissioner (PSC), in a recent op-ed in the Bozeman Daily Chronicle, calls the shift away from using corporate grid electricity the “new energy paradigm”. As Vincent explains:

A new paradigm is grabbing hold in the residential, commercial and public sectors of our economy. That is: local distributed or “on site” electrical generation and consumption (wind, solar, small scale hydro, biomas, geothermal, micro turbines, combined heat and power systems etc.) conservation, efficiency and smart-grid technologies (to increase the efficiency and capacity of existing electrical transmission systems rather than of building costly new ones at rate payer expense).

But, as Vincent cautions us:

The new energy paradigm is, for obvious reasons, being met with strong resistance by those who benefit from the status quo. Unfortunately, these self interests still carry a lot of political clout, witness recent Montana legislative sessions.

The “new energy paradigm” is a model that we must embrace. We need to get people and politicians to move on this.

Blog Postscript – Former PSC Commissioner Vincent adds the following clarification on the EEI study mentioned above:

The Edison Electric Institute is Big Power’s number one ally and voice (funded and supported by Big Power) and so their own consultant has: 1. Clearly identified Big Power’s dilemma and, 2. Recommended ways to beat back the new paradigm and maintain the status quo…… at rate payers expense. I think the recommendations cited in the consultant’s report can be boiled down to raising rates (one way or another) to offset the loss of revenue brought about by on site, distributed generation and improved efficiency.

In other words, Big Power will do everything they can to make us (rate payers) pay for distributed energy and efficiency……..the new paradigm, not their stockholders.