The ideal of a staid, heavily regulated industry that offers blue-collar jobs with respectable wages, pensions, and strong community ties—usually lamented as a thing of the past by observers on both the left (Elizabeth Warren, Paul Krugman) and the right (Pat Buchanan, Rick Santorum)—does still exist. To find it, one need look no further than America’s electric utilities.
Whether they are stockholder-owned colossuses or customer co-ops, utilities operate mostly under regulated rates that guarantee profits. They face little competition. In 33 states, consumers have just one power provider to choose from in their region. Nationwide, more than 80 percent of residential power comes from monopolies or former monopolies.
These utilities pay nice dividends to stockholders, offer jobs for life to many employees, and provide generous support for everything from civil rights organizations to art museums. Historically, the case for their status as “natural monopolies,” where competition would do more harm than good, has been so strong that it’s literally used as an example in major economics textbooks.
But new technologies—in particular, the growing availability of affordable, efficient rooftop solar panels—threaten to disrupt utilities’ business models in unpredictable ways. While this forthcoming disruption of the power grid may offer more good than bad, it also creates real uncertainties that policymakers will need to confront.
The major driver of change is that rooftop solar has finally come into its own. When first brought to market in the 1970s, rooftop solar panels generated power at a cost of more than $70 a watt. By the end of this year, low-cost manufacturers in China will begin offering panels that produce energy at a cost of around 40 cents a watt. Combined with leasing arrangements that let property owners install panels at little to no out-of-pocket cost and net-metering agreements that let them sell unused energy back to utilities (albeit under a variety of pricing schemes that are both complicated and controversial), the decision to install solar panels is becoming a simple one for many homeowners.
One recent study from the Rocky Mountain Institute, a think tank whose board is heavy with alternative energy investors, applies a rigorous model to conclude that, within two decades, solar will be fully cost competitive in many markets and for huge numbers of consumers. As one example, the study projects that, within 15 years, as much as a quarter of the power generated in New York’s Westchester County will come from solar panels. This could be a big problem for utilities. Rocky Mountain estimates they could lose nearly $35 billion in revenue. This amounts roughly to last year’s total revenues for the two largest electric utilities and is greater than the 20 largest utilities’ combined profits for 2014.
Even much smaller drops in revenue could be a big problem. The technology and business model of rooftop solar are most competitive in the areas where utilities make most of their profits. Because they generate the most energy during the sunny midday peak, when power generation is most costly and most profitable at the margin, even modest consumer use of the existing, relatively expensive solar panels can cut into some utilities’ bottom lines. Since they provide a direct substitute for some power plants run by existing utilities, rooftop solar panels establish a ceiling that would make future rate increases harder to sustain. Finally, since they reduce the need for some new types of power infrastructure, rooftop solar makes it harder for utilities to make the case to build new generation capacity. This is a potential problem because, in regulated markets, most of the cost of new infrastructure investment, plus a profit margin to reward investors, is built into utility rates according to a set formula.
Broader use of solar panels will reduce air pollution and the output of climate-change-causing greenhouse gases. It also likely will cut the bills consumers currently pay to utility-scale power companies. But this shift will cause real dislocations.
We live in an era of disruptive technologies, and in nearly every case, one can identify ways in which the new technology is inferior to what it replaced. Mobile phones supplanted more reliable landlines. Ridesharing services often provide smaller cars than taxicabs. Jet airplanes replaced more comfortable sleeper trains.