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Remain Profitable, Reform!

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Nevelyn Black's picture
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Nevelyn Black is an independent writer with a background in broadcast and a keen interest in renewable energy.  In the last few years, she transitioned from celebrity interviews and film shoots...

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The global energy transition from fossil-fuel based to zero-carbon generation is well underway but according to the International Renewable Energy Agency (IRENA) further action is needed.  

Without drastic changes to their business model and in the midst of a rapid transition to renewables, are utilities at risk of losing profitability?  Could the rise of renewables lower the profitability of electric companies and lead to more acquisitions and mergers? A researcher at Missouri S&T believes the energy transition will greatly impact utilities.  “We find an increase in energy produced from distributed sources reduces the profitability of profitable mergers and reduces losses from unprofitable mergers,” said Dr. Mahelet Fikru, an associate professor of economics at Missouri S&T. “The model also shows that the variability in electricity produced from renewable sources encourages utilities to produce more, which in turn magnifies the extent that extra renewable energy affects merger profitability.”  Advancements in renewable energy and energy efficiency are helping to meet carbon reduction goals but this shift requires reform to the traditional utility business model.

“These resources such as rooftop solar panels and small-scale wind farms are transforming the electric grid and changing business models by the day.” Fikru said.  EnBW, a publicly-traded energy company headquartered in Karlsruhe, Germany, started as a classic energy company but have now embraced change by focusing their business on renewable energies, electricity grids, telecommunications networks, e-mobility and smart, sustainable energy solutions.  When it comes to energy transition, their strategy is more about people than it is about technology.  “Empowering and engaging people from the beginning resulted in having a team that is highly committed to creating a successful transition,” said  Katharina Klein, Head of Sustainability at EnBW.  The company promotes its transformation from a classic energy company to an innovative and sustainable infrastructure service provider.

A report from the Rocky Mountain Institute encouraged utility reform in 2018.  Granted, a lot has changed in the industry, well in the world since then, but the need for reform still exists.  The report explored the changes in expectations and responsibilities.  Long-standing exceptions have been expanded and their priorities rearranged.  New expectations of utilities include environmental performance and customer choice.  Utilities were also urged to reform the cost-of-service model, the treatment of capital and operational expenditures, and the creation of new value-added services.  Are these options still relevant or have the last few years made them obsolete?  Ultimately, utility revenues are based on sales and their success, on good investments. With so many pandemic-related problems, can a traditional business model keep your utility profitable?  

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