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Why the Big End of Town is Paying Attention to Distributed Energy

The business model of large UK utilities is currently under siege from a combination of lower revenues and higher costs – and will need to embrace Distributed Energy to survive. Investors in Distributed Energy will benefit.

On the revenue side, the emergence of Distributed Energy is bringing new (competing) sources of supply to the grid, whilst also introducing new technologies to reduce customer demand. As customers use less power or produce their own, fixed utility costs fall on fewer customers, raising customer prices, thus giving customers greater incentives to use less power or produce of their own. If left to perpetuate, this creates a dangerous downward spiral for the large utility companies.

Meanwhile, utilities also face pressures on the cost side which are compounding the problems faced by falling revenues. Regulators are calling for higher spending on grid modernisation and resilience – calls which are particularly unwelcome given they are (in large part) being driven by higher load volatility coming from the new forms of Distributed Energy. Hence Distributed Energy threatens to provide a “double whammy” to utilities companies by decreasing utility revenues whilst simultaneously increasing utility costs.

The choice for utilities is simple – be a dinosaur, or quickly adapt. To be sure, the dinosaurs found themselves in a tight predicament – they had no system to warn of the impending comet strike, no political system to reduce climate change, and no subsidies to assist an orderly migration to warmer climes – and they did partially address the problem by sprouting feathers, and wings, and taking flight, and becoming warm-blooded birds. But it was too little too late.

By contrast, utilities today will need to adapt quickly. For sure, becoming more involved in Distributed Energy may cannibalise some existing energy sales, but utilities cannot allow themselves to be hamstrung by such concerns. Too many companies in other industries—including telecommunications, video rentals, and photographic film manufacturers to name just three —have made this mistake in the face of a technological shift.

The growth of Distributed Energy shows few signs of abating, with innovation contributing to falling costs and increasing consumer choice. Distributed Energy companies are spurring that innovation, and will continue to embrace new products and services that will keep the competitive pressure on incumbent utilities.

Utilities have many advantages they can leverage in this emerging, more competitive environment, and will need to follow the lead from those that have successfully navigated these challenges before. The best approach is to innovate, add services, and grow revenues – which for utilities would involve investing in flexible generation, grid support, energy storage, demand management solutions, and other new technologies.

At Oxford Capital we specialise in Distributed Energy investments that address these market needs. Our solar PV assets reduce transmission, distribution and environmental costs by producing energy close-to-market. Our Anaerobic Digestions plants provide all these same benefits plus added value from an uninterrupted baseload power supply, and associated heat output. Our Grid Capacity plants reinforce the transmission & distribution system to improve security of supply whilst reducing the need for expensive capital upgrades.

As these assets become increasingly valued by utilities, the position of existing Distributed Energy investors continues to strengthen.