Wanted: A New Biz Model for Electric Power

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Competition from Small Players

More threatening is the possibility that small, nimble competitors will jump in to work with customers to save energy, thus snaring the profits that come from greater efficiencies. "There are third parties—companies like EnerNOC (ENOC) or Comverge (COMV)—who can do things for customers that are more innovative than what we see from many utilities," says FERC's Wellinghoff. The French national utility, Electricité de France, has already taken a hit. Savings generated by a small company, Voltalis, have cut enough into the utility's revenues that Electricité de France is asking Voltalis to make up some of the deficit.

U.S. CEOs insist they'll do fine in this competition. "We'll have to prove that we can do it cheaper than anyone else, and I think we can," says Rogers.

Utilities will face competitive threats not just on efficiency but also on power generation. Consider the implications of a smart grid. One of the core concepts is that electrons will be able to flow easily in any direction, like information on the Internet. Suddenly it would be possible for Wal-Mart Stores (WMT) to install highly efficient generators and solar panels at its stores and warehouses, both to supply its own energy and to sell electricity on the grid. Or entrepreneurs could develop solar, wind, or other power sources for individual homes and communities.

Loss of Monopoly Status

"This will empower everyone to participate in the energy market," says Alex Q. Huang, professor of electrical engineering at North Carolina State University. Huang foresees waves of innovation in small-scale electricity generation coming along every couple of years, instead of the 40- to 60-year innovation cycle of central power plants. Massachusetts Institute of Technology researcher Daniel G. Nocera is working on a scheme to use sunlight and a catalyst to split water into hydrogen and oxygen, which would allow every home to make its own power. "I'm up to destroying the grid," he says.

CEOs concede this transformation is probably coming—eventually. "I've got to believe that energy production and storage becomes an appliance," says PSEG's Izzo. "It would completely eliminate utilities as a monopoly." So what's left? "Presumably, we then would become the service provider," Izzo says, delivering electricity but actually making less of it.

As a result of these threats, utility industry consultant Roger W. Gale believes, many companies will suffer the fate of the dinosaurs, losing out to creatures that could better adapt to changing climates. "Someone will find a better technology while they are still trying to run the same old units," Gale predicts. David Crane, CEO of NRG Energy (NRGA) in Princeton, N.J., says: "If we are not doing things completely differently by 2030, we will be in a world of hurt."

Carey is a senior correspondent for BusinessWeek in Washington.

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