How to avoid the utility death spiral

What is the utility death spiral?

Death spiral…sounds frightening, right? Well if the utility business model doesn’t change, corporations could face disastrous consequences. To understand the spiral, we must first understand the core challenge. Global CO₂  emissions from fossil fuels reached a record high of 36.6 billion tons in 2022. The primary drivers of these skyrocketing numbers are: oil, which is responsible for 40% of global fossil fuel emissions; coal contributes 32%; and gas with 21%. If emissions continue at this pace, the remaining carbon budget to limit global warming to 1.5°C will be exceeded in nine years. To prevent this from happening,fossil fuel companies must drastically and fundamentally transform their business models. So, what does this have to do with a death spiral?

The utility death spiral describes a ‘worst case’ scenario in which the traditional utility business model becomes unsustainable. This is happening because energy consumers are becoming more involved in their energy consumption, as well as production, to minimize their energy prices and encourage more distributed, sustainable energy generation. If traditional utilities don’t adapt their offering to accommodate the rise of prosumerism, they will lose customers. In turn, this would force companies to increase prices, making their offering less attractive (and rooftop solar more attractive) and thus initiating the constantly deepening death spiral.

Why is the utility death spiral more important now?

The idea of the utility death spiral has been around for a while but it is resurging now because of the urgent need to decarbonize and achieve the ambitious goal of climate neutrality by 2050.But the energy industry is very slow in adapting to these changes and companies that are not shifting their focus will soon fall behind. 

There is, however, still hope to climb out of the spiral. According to a report by the International Energy Agency, emissions from oil and gas operations account for almost 15% of global energy-related emissions. This includes the process of extracting oil from the ground, processing it for utilization and delivering it to consumers. This number – 5.1 billion tons of greenhouse gas emissions – is more than double the combined emissions of the United States and the entire European Union in 2022.

The report also states that with urgent and drastic action, these emissions can be reduced by 60% in the next 7 years until 2030. Halving the emissions intensity of oil and gas operations globally by 2030 would be costly, requiring upfront investments of around USD 600 billion. However, given that high energy prices enabled the global oil and gas industry to rise from an average $1.5 trillion to $4 trillion profit in 2022, this could simply be seen as a reinvestment of record profit in future-proof revenue streams.

Solutions to the death spiral

Many gas utilities’ favored future solution to transition away from fossil fuels is hydrogen. Much of the hydrogen produced today, however, is so-called gray hydrogen, which is still derived from fossil fuels and therefore still contributes to greenhouse gas emissions. The transition to hydrogen-based infrastructure also requires huge investments and significant modification to existing networks. The Australian Pipelines & Gas Association (APGA) is pushing towards hydrogen blending, where hydrogen is blended with existing natural gas pipelines. However, this faces many technical challenges and requires careful management. 

While hydrogen will play an important role in future energy systems, electrification enables decarbonization at lower cost and within shorter timeframes – if combined with the right technology. Prosumers are already jumping on the bandwagon by buying more and more rooftop PV systems, electric vehicles, batteries and heat pumps. In fact, SolarPower Europe, found that Europe reached 1 million solar-battery powered homes at the end of 2022, a 20-times increase on the number in 2016. However, this must increase by almost 22-times until the end of the decade – showcasing a major challenge, as well as huge revenue potential for companies.

The key factor that will differentiate successful energy companies in the future is the ability to provide end users with transparency and control over their energy production and consumption. Gone are the days where passive users view their electricity bill once a year – prosumers want to use intelligent solutions so they can actively minimize their costs and emissions without compromising on comfort e.g. that their electric vehicle is always charged when they need it and their home heated to a comfortable temperature. Clean energy systems will only work if we leverage demand-side flexibility, adjusting demand according to intermittent supply.

The utility death spiral in practice

Do you know how pearls are formed? Under a lot of pressure. We can take this analogy and apply it to our death spiral dilemma as well. While some companies are taking action and switching to innovative and sustainable business ideas, others are closing their oyster shell and missing out on the opportunity to create pearls themselves. 

Let’s take a look at some ‘in practice’ examples of companies that redirected their focus and those that did not:

Viessman is a well known German manufacturer for heating and refrigerating systems. For decades they relied on gas- and oil-producing heating systems. But over the last few decades, they have been transitioning to low-emission technologies. Firstly, they introduced hybrid heating systems that combine fossil fueled heaters with heat pumps, solar thermal collectors and photovoltaic plants.

Since 1990, Viessman has reduced their CO₂ emissions by 90% by focusing on heat pumps and clean heating and cooling solutions. In 2022, Viessman announced that they would invest one billion euros over the next three years in research and development as well as production capacities. With the recent climate- and geopolitical developments the group emphasized the need for speed to tackle climate change and utilizing future energy production in a clean manner. In 2021, the company witnessed an increase over 41% in heat pumps and 21% rise in revenue. Viessmann has been able to adapt to the changing market demand and continues to thrive. 

Another great example is the London-based oil company BP, which announced plans to reduce their oil and gas production by 40% while investing billions into sustainable energy technologies. The company wants to shift their focus to clean energy fields, such as bioenergy, hydrogen, as well as carbon capture and storage. With the expected decline in fossil fuels over the next 30 years of 75%, BP wants to increase their low carbon investments to 5 billion dollars by 2030. This way they want to achieve and work towards the net-zero emission goal by 2050. 

But not every company has  effectively shifted to clean energy solutions. Reduced energy consumption during the pandemic, cutoffs from Russian gas supplies, record-high gas and electricity prices during the energy crisis, paired with the decline of coal and oil utilization led many companies to fall right into the death spiral.

A total of 19 companies in the US filed for bankruptcies in 2020, with a combined debt of over 13 billion dollars. In 2021, 28 energy suppliers in the UK collapsed, displacing a total of 4.2 million energy customers. The largest company to go bust was Bulb, which had 2.4 million customers. Its alumni have now started nine startups that are emerging from the ashes, all of which have a focus on future-oriented clean energy solutions, primarily on distributed energy resources and quality software.

The fossil fuel industry has faced significant challenges, including plummeting oil prices, oversupply and an unrelenting recession over the last 11 years. Essentially, companies need to get out before it’s too late.

How to emerge from or completely avoid the utility death spiral

The most effective way to climb out of a hole is to avoid falling into it in the first place ;) Best done by looking towards booming industries.

The market for electric vehicles is projected to reach over 52 billion dollars in 2023 with an annual growth rate of 14,39%. In Germany the solar PV expansion rose to 28% in 2022 with 7.2 gigawatts (GW) of new installations added to the grid over the past year.  

Still focusing on fossil fuels and engaging half-heartedly in clean technologies will not be enough. Climate goals and geopolitical developments are pushing companies to redirect their focus towards prosumer technology – but the more successful companies will be those that lead the way and pull others with them.