For Utility Companies, 2019 Could Prove Interesting.

The Swamp Stomp

Volume 19, Issue 3

The demand for electricity has been continuously rising for the past 100 years.  Today, however, the demand is flat, and utilities are having to rethink their growth plans.  The US utility sector was originally built around the idea of perpetual growth in the industry. Now the utility companies are realizing that this may not be the case.

A decrease in energy usage should be good news because it means people are either finding cheaper, more efficient ways to use electricity or they are using less.  Either way, that’s a win-win for the environment. At the same time though, utility companies are slowly watching their revenues dry up.  The original models for the utility industry will have to change with the times. Utilities need to devise new ways to earn revenue, mostly through services, not products, as they have in the past.

The costs involved in the production of renewable energy are getting cheaper every year, and natural gas production is higher than it has ever been. U.S. natural gas exports at the beginning of 2018 were twice the 2017 average. Huge amounts of natural gas are being produced by extraction from shale and other sedimentary rock formations. With the abundance of relatively cheap, clean-burning natural gas, burning coal to produce electricity is no longer a competitive alternative, a big change from the past.

What this means for the future of the utility companies is still not clear. There are two kinds of utility companies, government-owned and Investor-Owned Utility Companies or (IOUs).  The IOUs are not permitted to make money on the actual selling of electricity. They make their money by earning a rate-of-return on power plants and the infrastructure that goes along with it. IOUs are struggling now because their infrastructure investments have dried up, along with their profits and the interests of stakeholders. Future profits are no longer guaranteed.

Utilities are trying to adapt by merging and diversifying into larger conglomerates.   Duke Energy bought Piedmont Natural Gas and has diversified its business by spinning off a company to transport natural gas.  Southern Company is taking a similar strategy, buying wind and solar plants across the country.

The U.S. uses 20% of the total electricity of the world, second only to China, while its per capita consumption is almost triple the consumption of China.  In 2017, U.S. consumption of energy came from many sources.  Over the decade 2004-2014, the largest increases in an electrical generation came from natural gas, wind, and solar. Power generation from coal and petroleum has decreased while other electricity sources have either remained constant or decreased.

These days, consumers are expecting more from their utility companies. They expect easy-to-use online interfaces, data about individual usage, and the option to buy energy from alternative energy sources. Self-production of electrical energy from solar panels is a popular option for many.  Consumers are also becoming much smarter about their energy consumption.  Homes are being equipped with upgrades such as Nest thermostats, solar panels, and LED light bulbs that help keep personal electricity costs under control.

With renewable energy sources becoming more financially competitive and energy-saving technology at our fingertips, utility companies must continue to adapt or face a bleak future.

1. Roberts, David, “After rising for 100 years, electricity demand is flat. Utilities are freaking out,” Vox, February 27, 2018. David Roberts
https://www.vox.com/energy-and-environment/2018/2/27/17052488/electricity-demand-utilities, 

2. Hoium, Travis, “Why Consolidation is the Name of the Game In the Utility Space”. The Motley Fool. June 4, 2016.  https://www.fool.com/investing/2016/06/04/why-consolidation-is-the-name-of-the-game-in-the-u.aspx

3. “Natural Gas Explained,” US Energy Information Administration. December 11, 2018. https://www.eia.gov/energyexplained/index.cfm?page=natural_gas_home

5. “Energy Dominance,” Department of Energy, Year in Review, https://www.energy.gov/department-energy-year-review-2018

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