Will Energy Efficiency Put Utilities Out of Business?

Utilities may find their primary markets pressured by improved energy efficiency and distributed generation. If they are unable to make up for lost revenue by entering new markets they may find the economics of their businesses under stress, challenging their ability to meet the needs of some of their customers.

The quandary the utilities are facing is analogous to that now faced by the U.S. Postal Service. Despite attempts to innovate and offer new services, revenues at the Postal Service are under pressure as customers shift to e-mail and commercial package delivery services. Now the Postal service says major budget and service cuts are required. And some of those services have no commercial alternatives, such as rural letter delivery. As the New York Times recently reported, the German postal service, by contrast, began adapting to changing telecommunications and e-commerce environmental years ago, and now offers a range of services in innovative ways that have helped keep it relevant to German consumers.

The McKinsey Quarterly has a provocative article about the energy efficiency quandary facing utilities. Looking at the European market, McKinsey’s analysis suggests that if existing energy savings technologies were employed selectively, a new home could consume around 90 percent less energy from the grid than it does today. Existing homes’ energy use could drop by 35 to 40 percent. This, says McKinsey, could cause utilities’ margins to suffer to the tune of 10 to 30 percent. McKinsey urges utilities to seek new sources of revenue, including

building fabrics (for example, roof and wall insulation), central systems (including heat pumps and lighting), appliances and electronics (energy-efficient white goods), “smart” applications (home area networks and energy storage devices), advanced metering infrastructure, microgeneration (for instance, small-scale wind turbines and solar panels), and the delivery of power for charging electric vehicles, as well as financing, insurance, and consulting services.

Consumers would likely be receptive to purchasing other energy-related goods and services from their utilities. Green Research recently surveyed U.S. consumers who have smart meters installed in their homes. Seventy percent expressed interest in getting expert advice to help them control energy usage, manage their energy bills or become more energy efficient. Of those, 68 percent said they’d like to receive that advice from their electric utility.

The implications are clear: utilities need to start exploring how to broaden the set of goods and services they offer to their customers. And regulators need to start lifting barriers to doing so. If not, some utilities might possibly find themselves unable to deliver electricity economically in the face of reduced demand.

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