The Utility Death Spiral
A dilemma of the modern electric utility.
In an era where our lives are increasingly intertwined with technology, our interaction with power and electricity is undergoing a profound change. You may have noticed more EVs on the road, seen a few more homes with rooftop solar in the neighborhood, or even talked with a friend who is unusually enthusiastic about taking their home “off-grid.” Most people would recognize these developments as indicators of a transition from fossil fuel resources to renewable resources. While this may be true, these observations also show that another, more subtle change is happening: the shift from a centralized utility infrastructure to a decentralized private infrastructure. This often-underappreciated development has the potential to restructure our interactions with electricity and bring our current electric utilities to a devastating collapse.
Consider this situation for a moment. You have just finished installing solar panels for your home. These panels may have been expensive, but they’ll help the environment, add value to your home, and help you save on your energy bill over their 20-year lifetime. As a homeowner, it’s a great deal. However, your exciting recent addition is your electric utility’s latest pain. Not only will they no longer be able to sell you as much power as before, but they now must pay for every bit of power your solar system sends back to the grid, whether they want that power or not. It’s a pretty pesky situation for them.
Still, the utility has a business to run and consumers to serve. The most effective way it can make up for your lost revenue is to raise prices for the rest of its customers. As a result, those who remain connected to the utility notice a small increase in their monthly power bill, but not enough to cause any alarm for the vast majority of users. However, for one of these homeowners, this latest price increase is the push they need to install that rooftop solar they’ve been considering. A solar system that will once again remove a source of revenue from the utility, force them to readjust their pricing, and make solar more attractive to a whole new group of homeowners. This simplified cycle repeats until the utility either innovates additional revenue streams or runs out of business from a lack of customers. This alarming process is the Utility Death Spiral (UDS).
Traditional electrical networks are built with a top-down approach. Electricity is generated from large, centrally controlled resources, such as coal or natural gas power plants, and fed into a carefully managed network of power lines which we call an electrical grid. For much of the 20th century, generation resources and the electrical grids that distributed power were managed by the same organization, the electric utility. Early electric utilities experienced never-ending growth as U.S. citizens fell in love with electricity. It wasn’t until electricity access across the U.S. became nearly universal in the 1950s that utilities began to see slowing growth in their industry. After demand growth dwindled to a fraction of its previous levels, the utility industry achieved remarkable stability. They had nearly all possible customers connected and constructed their generation accordingly, creating a marketplace of near-perfect supply and demand.
However, predictable environments can lead to stagnation, and stagnation can lead to deterioration. Although there was some innovation as they tried to retain early growth rates, utilities increasingly became inefficient, slow-moving monopolies. They became protective of their domains and exceedingly brutal as they squeezed out every bit of revenue they could from customers. Utilities also held a monopsony—a less recognized counterpart to monopolies, arising when a single entity stands as the exclusive buyer in a market. This monopsony position enabled utilities to prevent competitors from selling power onto their grid, even when those competitors had superior generators. The combination of utility monopolies and monopsonies severely limited innovation and diversification in the electric power industry.
In hopes of addressing this issue, among other energy troubles, the U.S. passed two laws that drastically reshaped the electric utility landscape. The first of these was the Public Utilities Regulation and Policy Act (PURPA) of 1978. The primary objective of PURPA was to increase energy efficiency in the wake of the 1970s energy crisis, but a small clause in this law required that utilities purchase power from independent generators at a fair price. At the time, this clause had a relatively minor impact on the industry, but as the number of non-utility generators steadily increased it became clear that PURPA had broken the utility stranglehold and opened the doors to distributed generation. The second law, the Energy Policy Act (EPA) of 1992, was perhaps even more impactful than the first. This scattershot legislation covered a variety of energy issues, but importantly, it forced the Federal Energy Regulatory Committee (FERC), the federal body that regulates utilities, to separately regulate generation and distribution. Many states took this a step further by requiring utilities to completely divest from their generating assets. This single law effectively turned electricity into a commodity, making it easier to trade than ever before. Utilities, many of which could no longer generate power, were relegated to being an electric delivery service. These two laws transformed the once monopolistic and monopsonistic utility business into an innovative and rapidly evolving, albeit volatile, industry.
This transformation, along with subsequent innovations, has forced utilities to confront the looming possibility of a death spiral after their century-long supremacy in the electricity business. In my earlier example of the UDS, you may have been led to believe that reduced electricity purchases are the largest driver of a UDS. While utilities can and do lose revenue from selling less electricity, the primary driver of the UDS is a reduction in the amount of electricity transferred and traded across the grid. With the changes from PURPA and the EPA, among other laws, utilities now make the majority of their income from developing and operating grid infrastructure, rather than from the direct sale of electricity, which must be provided at cost to consumers. You can think about it in this extreme: If all power was consumed in the same location that it was made, there would be no need to maintain an electrical grid to deliver that power. In other words, as electric delivery services, utilities suffer most when we use the grid less often, not just when we use less electricity. So, while shrinking energy payments from utility customers do contribute to a fall into the Utility Death Spiral, it is the reduced usage of the grid that truly threatens utilities. This doesn’t mean utilities will inevitably fail as more distributed generation gains popularity, but it does mean that utilities must learn to adapt to an environment they no longer control.
In response to this new environment, many utilities are embracing technologies such as smart metering and smart grids. Although these are often marketed as customer solutions, their primary benefit is to the utilities themselves. By offering insights into energy consumption patterns and, in some cases, enabling direct control over customer energy use, these technologies enhance the operational efficiency of utilities. They also create opportunities for new revenue streams, such as scheduled electric vehicle charging or energy-optimized air conditioning. As a result, utilities are pivoting to provide more energy services and tools to customers as a strategic move to ensure their survival in a shifting energy ecosystem.
Given the considerable scale of most utilities combined with the relatively unhurried adoption rate of distributed energy generation, many experts believe that the Utility Death Spiral is a debunked myth, or at best an exaggerated trend. While it’s probably inaccurate to say that all utilities are doomed to collapse from a death spiral, there is no doubt that rapid innovations are forcing creative destruction within the electric utility industry. The heart of the Utility Death Spiral dilemma is that utilities don’t yet know how to implement innovations like rooftop solar without putting themselves out of business, despite recognizing that a transition from their conventional top-down management structure is necessary to remain relevant. As a result, utilities often take a middle-of-the-road approach. They embrace technologies that benefit them while refusing to adopt other innovations, such as grid-enhancing technologies (GETs), that are detrimental to their current business model, even when these technologies provide a net benefit in the electricity value chain.
Despite the conflicted approach most utilities take toward innovation, we must continue to enable the advancement of our electricity infrastructure. In many ways, we should even encourage a Utility Death Spiral, or at least creative destruction, within our electricity industry. Utilities are only a portion of our electrical grid systems. Although they are a major player in that system, there is no irrefutable law that says they must exist as they do in their current state. If we want an energy system that is cheaper, cleaner, and more reliable than ever, we should pursue it regardless of the impact on utilities. The utilities will either avoid a death spiral by adapting to an evolving landscape, or they will fail as new entities emerge to meet our energy needs.