The Utility Death Spiral Scenario Is Realistic

Summary

• The centralized electric utilities are doing everything in their power to impede the growth of decentralized energy generation, which ironically should only accelerate the utilities' eventual collapse.
• A confluence of factors, including the aforementioned utility resistance to decentralized energy generation, and the rapid technological progress of energy storage should make the utility death spiral a probable outcome.
• The long-term outlook for the centralized electric utility industry looks bleak in light of the industry's general resistance to change.

While it may not appear so from the surface, the centralized electric utilities are in an extremely uncertain time. Despite the fact that major centralized utilities such as Southern Company (SO), Pinnacle West Capital (PNW), Public Service Enterprise Group (PEG), Edison International (EIX), etc, still generate the vast majority of electricity, their futures are looking bleaker by the day. With the rise decentralized electricity generation, namely in the form of solar PV, these centralized electric utilities are facing an existential threat. While the utility "death spiral" scenario has been written off by many industry experts as ludicrous, the electric utility industry looks to be headed down this road.

With the unprecedented progression of solar PV and energy storage technology, centralized electric utilities are being threatened in a big way. While the leading rooftop solar companies have always hoped for a mutually beneficial relationship with the centralized electric utilities, this hope seems to be rapidly fading as utility resistance seems to be growing. Ironically, the electric utility pushback against decentralized forms of energy generation may prove to be the utilities ultimate undoing. This utility pushback will likely accelerate energy storage and solar PV innovation, therefore ensuring that a utility death spiral scenario occurs.

Futile Attempts At Cooperation

Leading rooftop solar companies have made numerous public attempts to work with centralized utilities over the years, although these attempts have yielded little results. While it is clear to the leading rooftop solar companies that it would be in the best interest of both the rooftop solar and utility industries to work together, the utilities do not seem to be on the same page. While the reason for this is unclear, what is clear is that most utilities think fighting against rooftop solar is the best strategy.

Given that the economics of rooftop solar PV are improving at an extremely fast rate, these rooftop solar companies will be incentivized to push for more energy storage innovation if the utilities keep pushing back. As such, a utility pushback would actually be counterproductive for the utilities, although the vast majority of utilities are likely too myopic to truly embrace this view. Such nearsighted thinking by the utilities is only natural give their century-long monopoly over the electricity industry.

Despite pleas for cooperation from leading rooftop solar players, the vast majority of utilities are tirelessly trying to stamp out rooftop solar. Pinnacle West Capital is a perfect example of this sort of push back. The company's principle subsidiary Arizona Public Service has done everything in its power to impede rooftop solar, from allegedly using congressmen as a means of suppressing rooftop solar, to attempting to impose patently unfair surcharges on rooftop solar customers. The actions of APS are not unique, as utilities across the country are starting to adopt similar tactics.

The Death Spiral

While the utility death spiral scenario has been labeled as unrealistic by many, such a scenario is becoming increasingly probable. While this scenario could definitely be avoided if the electric utilities were more adaptable to decentralized generation, the vast majority of utilities are clearly not even trying to assimilate with rooftop solar. Given the rapid cost-decline of solar PV and rapid progression of energy storage technologies, the death spiral could very well occur. This, coupled with the utilities' resistance to change will only make the utility death spiral scenario that much more likely.

Again, the electric utility industry's resistance to rooftop solar is neither good for the utilities nor the rooftop solar companies. While the utilities' general refusal to cooperate with rooftop solar companies will only slow down rooftop solar's progress, it will likely lead to the collapse of the utilities. Whereas the utilities could eventually find profitable roles as grid service providers, this is becoming increasingly unlikely given the current situation. If events continue to transpire as they have been, the electric utility grids will likely become useless. Even if the utilities eventually decide to relent down the road, their initial stubbornness will likely have already encouraged the innovation of completely cost-effective energy storage without the grid.

The utility death spiral is a rather simple concept. As more individuals continue to defect from the grid (in the form of complete defection or load defection), the utilities will generate less revenue. Unfortunately, these utilities still have to maintain the same infrastructure as before. As a result, the utilities will have to increase rates on their remaining customers to compensate, which will only result in more defections. Thus, the cycle repeats itself until the utility eventually goes bankrupt. Here is a graphic that explains the process very well, using PG&E (PCG) as an example.

Source: sargosis

Likely Long-Term Outcome

With the way events are currently materializing, utilities likes Southern Company, Pinnacle West Capital, Public Service Enterprise Group, and so forth, have nowhere to go but down. Recent events almost seem to be a foreshadowing of the utility death spiral, from a ramp up of hostilities between the utilities and rooftop solar companies, to the release of a much cheaper-than-expected energy storage technology. The critics of the death spiral scenario seem to be discounting the incredibly fast pace of solar PV/battery technology advancements, and overestimating the centralized utilities ability to embrace change.

While there will inevitably be a few utilities that decide to embrace decentralized generation, the vast majority will likely continue to wage war against rooftop solar companies, therefore ensuring their own collapse. Although a much better future is available for both the utilities and rooftop solar companies, it is up to the utilities to decide if this future will become a reality. So far, the utilities are heading down the wrong path. Given the incredible pace of rooftop solar adoption, there is little chance that the utilities will have a change of mind before it is too late.

Conclusion

The utility death spiral is becoming an increasingly probably scenario given how electric utilities are responding to rooftop solar. Major electric utility corporations like Pinnacle West Capital, PSE&G, Southern Company, etc, are extremely overvalued at their current valuations. These companies are valued as if they will be the dominant energy generators for decades to come, whereas the reality is much more uncertain to say the least. Many of these companies have valuations in the tens of billions, with P/E ratios oftentimes in excess of 15. With the rapid rise of decentralized energy, these utilities should experience significant downward pressure in the long-run.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.