This Is What the Utility Death Spiral Looks Like  

Posted by Big Gav in ,

Greentech Media has an article on the impact renewable energy is having on utilities that haven't prepared for it - This Is What the Utility Death Spiral Looks Like.

The German mega-utility RWE provided another dismal reminder today of the painful transition European power companies are undergoing.

According to 2013 financial results, the utility lost more than $3.8 billion last year as it cycled down unprofitable fossil fuel plants due to sliding wholesale prices. The yearly loss is actually quite historic; it's RWE's first since 1949 when the German Republic was formed.

This follows poor earnings news from Vattenfall, a Swedish utility with the second-biggest generation portfolio in Germany, which saw $2.3 billion in losses in 2013 due to this same "fundamental structural change” in the electricity market.

The problem is well documented: high penetrations of renewables with legal priority over fossil fuels are driving down wholesale market prices -- sometimes causing them to go negative -- and quickly eroding the value of coal and natural gas plants. At the same time, Germany's energy consumption continues to fall while renewable energy development rises.

RWE's CEO Peter Terium called it "the worst structural crisis in the history of energy supply."

To make matters worse for utilities, their commercial and industrial customers are increasingly trying to separate themselves from the grid to avoid government fees levied to pay for renewable energy expansion. According to the Wall Street Journal, 16 percent of German companies are now energy self-sufficient -- a 50 percent increase from just a year ago. Another 23 percent of businesses say they plan to become energy self-sufficient in the near future.

It's a real-world example of the "death spiral" that the industry has so far only considered in theory: as grid maintenance costs go up and the capital cost of renewable energy moves down, more customers will be encouraged to leave the grid. In turn, that pushes grid costs even higher for the remainder of customers, who then have even more incentive to become self-sufficient. Meanwhile, utilities are stuck with a growing pile of stranded assets.

When unveiling today's dismal earnings, RWE's Terium admitted the utility had invested too heavily in fossil fuel plants at a time when it should have been thinking about renewables: "I grant we have made mistakes. We were late entering into the renewables market -- possibly too late."

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