New sources of revenue: What will generate growth for utilities?

Retail electricity sales have flattened as distributed generation has gained in popularity. Utilities are searching for new sources of revenue in response.

According to the Energy Information Administration (EIA), retail sales of electricity have been relatively stagnant for more than a decade. There are multiple reasons for this, but this stagnation has utilities seeking new sources of revenue. Let's explore the factors behind this lack of growth and the innovative ways utilities are nevertheless attempting to grow revenues.

EIA data show that since 2001, overall retail sales of electricity have risen by less than 11%. However, between 2007 and 2015, there was no growth in overall retail electricity sales. Slight growth among retail and commercial users was offset by a decline in sales to industrial users.

This flattening of growth since 2007 is rooted in the recession of 2007–2009, and in the rise in energy prices since 2007. These factors prompted many customers to conserve, become more energy efficient, purchase power directly from a third-party supplier, or produce their own power. As utilities are becoming less centralized, these factors will have a continuing and long-term impact on demand growth, which has led utilities to search for new sources of revenue to grow their business.

Utilities that are looking to grow will likely need to seek opportunities that do not rely on load growth. Many customers are using less energy than in the past, and a growing number are producing more of their own power. Because virtually all customers still rely on the grid to some degree, some utilities are moving to demand charges based on peak usage for the year to cover the fixed costs of operating and maintaining the electric grid.

One future model for utilities is being developed in New York. In 2014 the New York Public Service Commission (PSC) launched Reforming the Energy Vision (REV), with the goal of reforming regulated utilities into distribution system platform providers. The 2030 goals are to reduce energy consumption in buildings by 23%, increase renewables to 50% of electricity generation, and reduce greenhouse gas emissions by 40% (from 1990 levels). Because each of these objectives has the potential to reduce income for the utilities, REV attempts to align these objectives with utility profits. In addition to the traditional cost-of-service model for revenue generation, utilities can now earn money by achieving metrics related to these goals.

Aside from changes in rate design, many utilities are reacting to reduced energy consumption by moving into new businesses. After the experiences of the 1990–2000s, some may be reluctant to venture into new areas as past utility forays into non-traditional services often performed poorly. There are many reasons for the poor performance, but a common theme was a lack of experience in some areas, which led to unrealistic financial projections and unappreciated risks.

Despite previous failures, the shifting landscape in the utility sector creates incentives to pursue new business opportunities. This requires thinking creatively, understanding the reasons previous ventures failed, and either sticking to businesses close to the organization's core competency or hiring teams with the appropriate expertise.