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Should we be worried about a utilities death spiral?

The way things are going, it’s looking like the energy sector is on the verge of extraordinary change, one in which the continued rollout of solar PV unseemingly culminates in a full-scale utilities death spiral.

In this scenario, traditional energy actors like large power stations and national grids are replaced by a series of connected distributed grids- forever changing how we see energy.

Are traditional energy providers doomed, or will they pivot to ride the green wave without going bust? Hydrogen seems to be the only future, unless the path to salvation lies elsewhere?

In this article, we delve into the complex chessboard of energy economics, emerging technologies, and the tantalising potential of a fully decentralised future. It’s a high-stakes game, and the clock is ticking 🕦

TL;DR

The utility death spiral is a theory where traditional utility companies like power stations rapidly decline upon the rise of distributed grids.
We think that natural gas utilities are more likely to experience the death spiral than electricity utilities.
It is very hard to predict if this will happen as technology is moving very fast, and it would take a single innovation to change everything.

What is the utility death spiral?
How did the theory arise?
Is a Utility Death Spiral Likely?
Conclusion

What is the utilities death spiral?

The utilities death spiral posits that traditional utility companies may eventually go bust due to a spiralling decrease in revenue and an increase in costs, owing to their inherent struggle to adapt to the energy transition.

Here’s the potential scenario:

As customers increasingly generate their own electricity through rooftop solar panels and other renewable energy technologies, they buy less electricity from traditional generators, eroding its revenue.
Utility companies, burdened with relatively fixed costs for infrastructure like power lines, gas pipelines, and power plants, face fewer customers to distribute these costs, forcing them to raise rates.
Higher rates, coupled with the benefits of self-generation (energy independence through batteries, profits through electricity arbitrage and p2p trading) would exacerbate the financial spiral.
Even if utility companies attempt to reduce costs by decommissioning their infrastructure, the short-term cost intensifies the rate increase, sending them spiralling down into Dante’s hell.

While this is music to the ears of anti-capitalists and anarchists, the truth is that the energy industry is a cornerstone of the modern financial system. Its sudden collapse would certainly send the world into a devastating financial crisis, including loss of pensions, social unrest, etc.

Let’s not forget this doesn’t include water utilities as we still haven’t figured out how to fill a water tank using a pocket-sized device– there is simply a need for large-scale infrastructure.

How did the theory arise?

Back at the dawn of utilities (late 1800s to early 1900s), all utilities were natural monopolies. The cost and complexity of generating and distributing electricity made it such that only large companies, backed by serious capital, could undertake these endeavours. Governments, in turn, heavily regulated these entities to ensure quality services and fair prices.

This model thrived for a century, paving the way for a trillion-dollar global industry that now has to adapt to shifting sands. Climate change has emerged as an urgent concern, prompting net zero agreements and spurring advancements in renewable technologies.

The term “utility death spiral” began cropping up in media circles during the 2010s, as more people started producing their own electricity to simultaneously slash both their energy bills and environmental footprint.

With policy and technology tailing close behind, European countries like Germany, the Netherlands, and Spain produce significant amounts of electricity from micro-renewables, impacting utility businesses directly.

Is a Utility Death Spiral Likely?

Partisanship is the status quo on this subject.

On the one hand, some insist that the utility death spiral is inevitable, while the opposition maintains that it won’t happen because of the amount of power the energy industry holds.

Let’s delve in deep–

Will the Gas Infrastructure Transition into Hydrogen?

Energy companies have been devising strategies to participate in the energy transition while changing the status quo as little as possible.

One frequently cited strategy is repurposing gas pipelines and storage facilities to store and transport hydrogen once natural gas is phased out, given hydrogen’s reputation as a potential fuel of the future. While this seems intuitively logical, it’s not as simple as changing ‘tit for tat’.

Hydrogen and natural gas may be combustible, but their properties vary significantly. Hydrogen’s smaller atoms could potentially leak through existing pipelines unless these are treated to be more impermeable. This may sound as simple as applying a coat of paint, but remember; we’re talking about hundreds of thousands of gas pipes across the globe!

Hydrogen also differs by having a lower energy density than natural gas, meaning more of it is needed to deliver the same amount of energy. This calls for higher pressures to ensure the fuel is delivered at the right rate, meaning an entirely new fleet of compressors must be integrated into the network. This doesn’t even begin to address the ability of ageing gas pipes to withstand the increased pressure load.

There’s also scepticism about how hydrogen will be produced. Many suspect the vast majority will be derived from burning fossil fuels while using carbon capture and storage technologies to render it ‘carbon neutral‘, yet we all know this is mere greenwashing compared to actual green hydrogen, which unfortunately remains largely in its infancy.

And then there’s demand for hydrogen- which remains significantly behind that of electrical applications. EVs are replacing cars, and heat pumps are replacing gas boilers, but we’re hearing little about hydrogen boilers and vehicles. Aside from a few heavy industries like steel-making, where hydrogen seems to be the only feasible route to significant decarbonisation, there is little else to brag about, while long-term green underground hydrogen storage remains a distant pipe dream.

Nonetheless, the so-called “smart money” is betting heavily on hydrogen. Last year, for instance, an Australian company acquired a controlling stake in the UK’s natural gas grid to “support the expansion of hydrogen’s role in the energy mix”, valuing the entire network at nearly $13 billion, despite the arguments raised earlier.

This implies that taking the opposite stance means betting on energy companies’ ability to promote the hydrogen agenda, even if electrification seems more logical to meet the net zero target by 2050. With their vast amounts of capital and status as too-big-to-fail entities, energy companies make this a fascinating game theory case of who wins, money or common sense? The real world, in essence, is a massive chessboard.

Only time will tell if this huge and inflexible gas network will become recyclable junk or the cornerstone of the future of energy. And who knows, perhaps the development of micro-scale hydrogen production (i.e., electrolysing your own green hydrogen at home using your excess solar energy) will ultimately put the last nail in the gas utilities coffin.

Will the Gas Infrastructure Transition into carbon capture?

Owners of energy assets are exploring other paths to engage in the energy transition. One such path is Carbon Capture, Utilization, and Storage (CCUS), a process that would leverage existing gas pipelines to transport liquefied carbon and inject it into depleted oil & gas reservoirs.

The carbon for this process would come predominantly from these two sources:

Carbon capture at the source from industries that rely on combustion and hence cannot entirely avoid carbon emissions. This includes heavy industries and biomass energy plants like the Drax Power Station. 🏭
Direct Air Capture (DAC) is a method that passively removes carbon from the atmosphere. However, this approach has its challenges. For one, extracting carbon from the relatively low concentrations found in the atmosphere is counter-intuitive. It’s essentially an attempt to mimic what trees do naturally, but without the numerous other benefits beyond absorbing carbon. We think it’s just greenwashing that diverts resources from more impactful activities such as reforestation, conservation, renewable energy, and so on.

But despite making little sense to use the gas infrastructure in this way, the carbon capture narrative is strong, with billions of public investment dollars being funnelled into these technologies due to persistent lobbying from energy companies. Who will prevail? It’s anyone’s guess.

What will happen with the electricity infrastructure?

While gas utility companies grapple with existential questions, the fate of the electricity infrastructure looks somewhat different. Unlike natural gas, the electricity demand is predicted to rise as global electrification increases.

Yes, we’re seeing a surge in the efficiency of electrical appliances and devices that contraries this, but with the developing world rapidly gaining access to technology, the electricity demand is likely to continue its upward trajectory.

Consider the rapid roll-out of EVs, the expansion of international interconnectors, and the rising popularity of heat pumps. Satellite internet services like Starlink and OneWeb are swiftly bridging the internet connectivity gap, which in turn is driving demand for online-capable devices.

Add to this the advent of AI, blockchains, VR headsets, cloud computing, among other technologies. In essence, the future is net-zero and fully digital – a bullish forecast for large power generators that currently generate the bulk of global power.

But even in this seemingly promising landscape, the swift rise of distributed grids and off-grid technologies has traditional industry players on edge. The primary factor behind this anxiety is the exponential decrease in the cost of micro-renewable technologies, most notably solar panels. They’ve become so cheap that they’re now officially one of the most affordable sources of electricity.

Moreover, the world of micro-renewables is developing quickly, with innovations like containerized micro-nuclear, portable solar, airborne wind energy, and bladeless wind energy. Add to this the rapid growth in micro energy storage systems, which in conjunction with intermittent renewables, allow for total energy independence, reflected in the rise of fully off-grid living.

The icing on the distributed grid cake is the emerging possibility of electricity arbitrage. People using distributed grids could potentially turn a profit, and as we all know, money makes the world go round.

So the real question is, will the rise of distributed grids or electricity demand accelerate faster? Predicting the answer feels like a dice roll, and only the unfolding events of the next couple of decades will determine whether an electricity utility death spiral is in the cards.

Maybe solar panels will continue becoming cheaper, or perhaps we’ll discover an unlimited supply of the metals that remove any blockers to mass electrification. On the other hand, the leap from 60% to 100% global internet connectivity over a decade might create such large electricity demand that we’ll have to bring coal power back into the mix.

Ultimately, only time will tell. And let’s not forget that traditional electricity generators like coal will need to diversify into other energies – a shift illustrated by Drax’s evolution from Europe’s largest coal power station to the world’s largest biomass power station. Those who don’t adapt will undoubtedly face a death spiral.

Conclusion

So, is a utilities death spiral on the horizon? For gas utilities and traditional coal companies failing to adapt and transition, the outlook seems rather bleak, regardless of how much they lean into greenwashing tactics and similar practices.

However, for business energy suppliers —including those harnessing the power of wind, nuclear energy, and geothermal sources—the future appears rather bright. Their prospects seem to be resilient to the whirlwind of the utility death spiral, and instead, they’re on a trajectory towards a brighter, cleaner, and more sustainable future.