Are we heading for a utility death spiral?

In the US, the New York State electricity regulator is conducting a wholesale review of the electricity market and its regulation to identify the reforms necessary to adapt to the paradigm shift of distributed energy. In doing so, it hopes to avoid what our cousins across the pond have dramatically dubbed the “utility death spiral”: the process whereby traditional, centralised utilities will become increasingly outdated and irrelevant as customers capitalise on cheaper, greener and more efficient distributed energy.

In the UK, we’re still quibbling about whether smart meters are a worthwhile investment – see p26 for this week’s comments from Public Accounts Committee chair Margaret Hodge questioning the value customers will receive from smart meters.

There’s a fundamental mismatch here, a failure on the part of the establishment (political and business) in this country to grasp the scale of the change ahead: the degree to which consumer behaviour will change; the changing role electricity will play in everyday life; and the way our systems and processes need to change to accommodate that.

A report from IPPR this week summarises a few of the dynamics at play:

•    solar costs are falling rapidly; solar energy will be as cheap as energy from the grid in the UK by 2020, according to Citibank. Wall Street brokerage firm Sanford C. Bernstein believes solar will “become so large that eventually there will be consequences everywhere”. The cost of onshore wind power is also falling fast.

•    Europe’s top 20 utilities have lost half their value in the past six years, and had their credit records downgraded; Citibank projects that distributed electricity technologies will lead to a halving in the size of the market open to utilities over the next two decades.

You wouldn’t guess that from any of the policies or discussions currently doing the rounds in the UK energy sector. Will Ed Miliband freeze prices in 2017? Can the DNOs save £400 million from the smart meter rollout? Will the Competition and Markets Authority order reform of the big six?

These heated questions miss the point that a seismic shift is occurring globally in the way energy is generated and consumed. Politicians, regulators and business leaders need to stop looking two years ahead and start looking 20 years ahead. They may not like what they see.