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Changing Dynamics in the Utilities Sector

One is solar power. Utility managers refer to solar power operating on consumers' properties as "distributed energy resources" (DER). Utilities do not care if it is solar, wind or fuel cells. Any energy produced on the property is less energy delivered to the property. Add all the DER assets together, and a lot less power needs to be distributed through the utility's system. As more solar is installed; the utility's unit cost of energy must go up.

Another change is demand response. Again, industry insiders prefer a different term. Demand response is part of demand-side management (DSM), which includes having the consumer invest in energy-efficiency technologies. Add all the DSM assets together, and a lot less power needs to be distributed through the utility's system.

Another change is energy storage. This could be in any form, including customer-owned pump storage or car batteries from Tesla Motors (TSLA). As customers combine distributed energy with energy storage, even less energy is needed from the native utility.

In the end, independently owned microgrids would combine all the technologies. The combined effect would reduce energy consumption even further.

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For the foreseeable future, consumers will need the local distribution utility to provide reliable sources of energy. However, as consumers consume less and demand higher levels of reliability, their unit costs must increase.

The mistake is to position this issue as a price on energy. It is really a price for reliability. Utility shareholders want a return on their investments. If they do not get their returns, they will invest elsewhere.

The nation has about 3,000 electric distribution utilities. It also has about 1,200 gas utilities. All are regulated by their respective state governments. These utilities operate under government-guaranteed cost-plus arrangements. This means a return on equity at the top line. It also means repayment of debt.

Unfortunately, this could become a social issue. Those who cannot afford to invest in solar or other distributed energy or DSM will end up paying the most for their energy. In all likelihood, those will be lower- and middle-income customers.

This is a customer issue, not a shareholder issue. Since shareholders own a regulated asset, they are assured a prudent return by state regulators no matter how much energy is, or is not consumed. For those who are concerned about reliability costs, "prudent returns" mean reasonable returns, not sky-high returns.

At the time of publication, Glenn Williams had no position in any of the stocks mentioned.

Glenn Williams has more than 30 years of experience in power and fuels, including design, engineering, construction, startup and operations of large-scale power projects. He has had direct involvement with coal plants, natural gas facilities, and approximately half of the nation's nuclear power facilities and designs energy strategies for regulated and unregulated energy organizations. He received a bachelor's degree in electrical engineering from Northeastern University and a master's degree in technology management from the University of Maryland.

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