The electric and gas utility industries are facing substantial changes. For decades, rising sales have contributed to increasing revenues and profits, but the combination of improved energy efficiency with the growing use of solar electric systems and other forms of “distributed energy” has reduced growth rates, which could lead to small declines in future sales. But these potential small declines will not lead to the kind of “death spirals” claimed by some industry alarmists, as our new report, The Utility of the Future and the Role of Energy Efficiency, shows. Still, the industry and their regulators will need to make substantial changes in the next few years in order to continue providing quality service at a reasonable price, while providing utilities reasonable returns on their investments.

According to the alarmists, utility sales could plummet, requiring utilities to raise rates so they can recoup their fixed costs (such as the cost of the current distribution system), and these rising rates would drive additional customers to leave the system, a phenomenon they call a death spiral. Our study examines three potential sales scenarios, employing increasing levels of energy efficiency, solar electric power and electric vehicles. The most extreme scenario includes levels of energy efficiency now being achieved in only a few states plus the use of solar electric power that eventually uses nearly all available roof space. Under this extreme scenario, national electricity sales decline about 10% by 2040, an average reduction of 0.39% per year. Under a more likely mid-range case, sales grow 0.04% per year, while under the reference scenario, developed by the Energy Information Administration , sales grow 0.7% per year.

Creating Resilient Electric Utilities

In our view, a 10% sales decline over 25 years is far lower than what would be required to initiate a death spiral. Under the more likely scenario, sales are essentially flat. In such a scenario, utilities that have relied on rising sales to fuel profits will need to pursue new business models if they want to see profit growth. To address this finding, our report recommends that utilities offer optional energy-related services to their customers, including energy efficiency and technical help and financing for larger customers installing and operating high-efficiency combined heat and power systems. Such efforts can contribute to utility profits, reduce customer bills (since consumption is lower) and also provide services that customers value, positioning the utilities to offer additional services.

To support this effort, we also recommend that regulators

• adjust rates so that fixed costs are fully recovered as sales levels change,

• provide utilities financial incentives for meeting energy efficiency goals,

• reform ratemaking so that costs are fairly allocated and price signals encourage efficient use of energy, and

• develop rules to improve the ability of utilities to offer optional services in ways that provide a level playing field relative to non-utility providers.

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Quite a few states have taken some of these steps, but only a few states have taken most of them. In addition, we recommend upgrading management of the electric grid to better handle increased amounts of variable and distributed generation .