A brutal storm ripped through southwestern Minnesota in April and snapped 2,000 power poles. Worthington Public Utilities kept the lights on with a seat-of-the-pants microgrid.
The New Normal
Our economic future depends on adaptability.
employment rates and median incomes. Indeed, in El-Erian’s new normal, he tacitly attributes this phase of consolidation and de-risking to investors’ recognition that America’s financial future might be less solid than it once appeared to be.
Now, before anybody jumps of the ledge, consider that El-Erian might be wrong. Some very good economists disagree with him. They argue that recessions come and recessions go. Each one seems terminal when we’re in the middle of it (see “No New Normal: JPMorgan Sees V-Shaped Recovery in U.S.,” Bloomberg.com, Aug. 14, 2009) . And even if El-Erian is right, he isn’t saying we’re walking into a tar pit, but an extended briar patch. As long as America retains its efficient free-market economy, with a healthy democracy and a free populace, we’ll adapt to whatever changes occur.
Although trends in energy consumption, financial markets and government policies clearly affect utilities, the industry’s performance actually seems somewhat detached from broader economic trends. Regulated utilities in most states still operate under a cost-of-service business model that tends to insulate the industry. So while utilities and regulators might hear more complaints when costs begin rising, utility returns will remain strong as long as the regulatory compact remains in effect.
Thus a valid question arises about this “new normal” idea; is it merely a short-term distraction, driven by shifting economic and political currents? Or is it a long-term reality that might change the U.S. utility business model?
The answer depends on a series of industry-specific developments involving green policies, technology trends, fuel prices and consumer behavior.
First, the green movement shows no signs of reversing course, having progressed steadily for at least 40 years, since President Nixon signed the Clean Air Act in 1970 and created the EPA. Even when the political pendulum swings back from its current leftward course, green-policy mandates will continue—albeit perhaps with greater flexibility.
Second, renewable energy and battery technologies have advanced dramatically in recent years, portending logarithmic market growth in the next decade (see “ Sunrise”)—especially for PV plants and electric vehicles. At the same time, the utility industry is embracing smart-grid technologies. Even in the most traditionally-regulated, vertically-integrated markets, utilities such as Southern Company are installing smart meters and automating distribution systems.
Third, fuel-price trends remain notoriously difficult to forecast. If gas and oil become scarcer, sooner than expected (see “ Betting on Shale ”), then sheer economic necessity could transform alternative energy into mainstream energy, and ratepayers into savvy and engaged consumers. But even if fuel prices remain relatively stable, analysts across the spectrum expect electric rates will rise substantially during the next several years—even without factoring in the prospective costs of GHG regulation. Cost pressures might slow the transition toward more expensive green energy, but at the same time they will place a premium on improving system efficiency and giving customers greater control over the way they use utility services—especially if El-Erian’s new normal proves correct.
The final piece of the puzzle, customer behavior, also remains somewhat difficult to predict—but that’s changing. Regulators and transmission-system operators are